C-Corp Designation Danger

Most accountants advise their clients to take the S-Corp election rather that remaining a C-Corp. There are going to be a few specific situations that will require keeping the C-Corp, but the majority of small to mid-sized businesses meet the S-Corp criteria. The principle advantage to choosing the S-Corp vs. the C-Corp is the tax liability. The owners of the S-Corp are taxed (once) at their personal tax rate on the year-end profit, whereas the C-Corp is taxed on a higher corporate tax schedule on the same profit and then shareholder dividends are taxed again at their personal tax rate.

When selling a business, this can become a complicating factor. C-Corps are going to pay a much higher rate than the S-Corp upon the sale; so many C-Corp owners want to sell the stock to reduce the tax liability. However, buyers do not want to buy a company’s stock because of some large ongoing liability issues, the ongoing double taxation mentioned above, and they would not get other tax benefits they would receive in an asset sale. Typically, if a buyer has to acquire the corporation to make a deal work, the price they will be willing to pay for the business will be cut to balance the risk and increased tax.

Seek advice from a trusted tax or estate attorney or CPA. It is never too late to change to the S-Corp designation. Even if you plan to sell your business within the next year, there will be advantages to change now. For more information, contact your Apex Business Advisor.